When To Consider Doing A Merger

The following is a correspondence I had with a solo practitioner over LinkedIn this weekend. I asked him for permission to reprint it, anonymized of course, with a bit of light editing for clarity. To differentiate, my correspondence is in bold and italics, his is regular, and they’re divided by +++++. I hope there are other solo practitioners who this correspondence benefits!

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Hi Pat, thanks for making the connection. I’ll try to be brief to be respectful of your time. If this is easier over the phone let me know.

I am a relatively successful independent contractor in paid digital media, perhaps could be considered a small agency. I’m considering merging my business with a guy who I think is doing good things in the space, who is basically in a similar position, but has a bit more of a platform to work with (website, lead flow, etc), which I do not.

We are both wondering if it’s a good idea to have “two chiefs” as founders of an agency at this early stage, or if one chief with more “Indians” and/or technology and/or outsourcing is a better way to go.

I couldn’t tell if you had a co-founder for Hanapin, but curious if you did, what was the division of labor? Were you looking for complimentary skillsets or similar skillets with more time since there were two people? If you didn’t have one, would you have seen value in having one early on?

Thanks again for your time!

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Happy to help…

I didn’t have a co-founder. But I do advise lots of companies that do have co-founders. It’s never a good idea to have co-CEOs, which is both people in charge but it’s certainly okay – and it’s fairly prevalent (as a solo founder, I’m pretty rare) – to have co-founders.

Having co-CEOs means that no one is in charge and employees don’t know where the buck stops. Even a CEO and a president in startup is a bad idea, as they’re essentially the same positions. Ben Horowitz has more here.

Having co-founders means that each should have set responsibilities and they’re divided with virtually no overlap (some is okay but it’s not good to have overlap on day-to-day operations). You can certainly both manage accounts but I would recommend that in your early stages, all other responsibilities should be pretty well divided.

You can certainly grow your agency on your own without a co-founder. It’s just a tougher road as there is no one there to pick up your slack – both when you have bad days and need support and when you don’t have the skills needed to grow the company in the way it requires.

You can certainly outsource. We do that occasionally when we have too much work. I wouldn’t recommend it though on a widespread basis since by its nature, the help isn’t reliable (they likely have full-time jobs so when push comes to shove and they’re tired or don’t have time, you won’t get their best work) and the company feels “temporary”. Companies like [REDACTED] have done it though – combined with full-time employees – and it seems to work for them so it’s really whatever you want to make work. But like I said with not having a co-founder, it’s possible but it’s just a harder road.

I’m happy to jump on the phone next week if you like. Just let me know some times you’re free.

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Thanks Pat, that was very helpful! I’m going to confer with my potential partner and see what he thinks.

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You’re welcome. Happy to jump on the phone after the two of you have talked. Just let me know. A few other considerations, after reading through your initial message again:

1) If you believe he has a bit more of a platform to work with, how long would it take you to replicate it? Meaning, is it worth it to split the proceeds of your combined company, in exchange for this platform? As a silly example to illustrate, if the platform allowed you to generate 0% more business (i.e. he’s generating as much as possible for it) and it would take you only a week to replicate (again, a silly example to illustrate), it wouldn’t be worth it to split the combined company 50/50. If, however, you could generate 50% more business and it would take you a year to replicate, then merging makes more sense.

2) Regardless of your decision, it’s helpful to have technology (e.g. Excel macros, and platforms like Acquisio/Kenshoo/Ninja Cat). More clients are expecting it (and so you can charge for it) so having it puts you on equal footing with other agencies and not having it means you’re selling from a position of weakness. It reduces your dependency on rote tasks that a) could introduce errors if not done properly and b) that takes up time that you could otherwise spend on strategy and plans.

3) There were certainly times where having a co-founder would have helped. But I think on the whole and with the benefit of hindsight, I’m not sure I would have traded half of my company for those times. I prefer being in control of my destiny and not having to answer to anyone. You might be able to replicate some of the benefits of a co-founder (like having a check and balance for you, having a second set of eyes and opinions on things, etc.) with a formal advisory board or a peer advisory group like Vistage. I did the latter and it was one of the smartest decisions I ever made for the business, co-founder or not.

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Interesting. For some more perspective:

Me: Independent contractor relationships, six figures in business. Great relationships when I get them, but no steady bus dev strategy. Mostly networked for clients, but I don’t get new ones often. Have built business mostly by client retention. But relationships are for “Bob” rather than “Bob’s agency.” Getting burnt out with the high capacity workload day in and day out (servicing clients, maintaining the relationships, etc.) No more ability to scale. No strong differentiator for sales.

Him: Has developed a strategy for SEM and deep business insights that I think is very interesting, and could be sold effectively to clients. He is investing in developing tech to scale. He is selling it successfully. But he is also running out of time and energy working so much. Can’t effectively do client acquisition, retention and marketing business.

So by merging we would have more combined revenue to play with, potentially able to hire and free up time for growing the business and developing a more sustained marketing strategy.

If we don’t merge, I would probably continue cash flowing the 90% margin business and trying to branch out into other things. For example, I am invested in a startup and working with them on their eCommerce.

He would continue to try to grow the business and hire as it grew, presuming he could take on much more himself.

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My $.02: If you’re getting burned out with the high capacity workload, I would take a step back and ask yourself what you truly want to accomplish with your life/career. Because taking on a partner means more of the same until you finally reach enough scale that you can slow down a bit. You might consider, for example, that if you’re making $100k but you really only need $75k to live on, firing some clients (or maybe as a precursor to that, outsourcing them so that if you have other clients who leave, you have a bugger or maybe even raising prices to force some clients to leave on their own).

As long as the agency is just you, you’ll always have the issue of the relationships being “Bob’s” rather than “Bob’s agency.” I experienced the same thing at Hanapin when it was just me. It took 4-5 years after we started hiring employees to break out of that cycle. Even with a partner – because there are no other employees to have relationships with those clients – the relationships will be “Bob’s and Steve’s” and not “the agency’s.”

I think the things that your potential partner brings to the table are all good, so long as you want to grow the agency and really scale it. But if you just want to slow down (which is okay) or have a lighter work load (which is okay) or grow 10% more (which is okay too), having a partner just complicates matters even though it may feel like having someone else there will divide the workload.

If you want to maintain your current client base, then having a differentiator for sales is moot. Retaining clients isn’t terribly sexy but it pays the bills and is what I did the first 3-4 years where we rarely lost a client because it was the founder doing the work. If you want to grow, then you need to choose a repeatable pain point you can help clients with.

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All good points. Indeed, a big part of the reason I want to work with this guy is that I think he has a ton of business and marketing knowledge that he picked up from his education and work experience that I would love to have. Partnering with him would actually probably mean a pretty significant reduction in my current revenue. So I’d be giving up some of that for learning, and for the prospect of building something larger.

I have lost some of my excitement for the industry, whereas when I started I was extremely passionate about it and wanted to learn everything I could. So the prospect of this partnership has kind of reignited that a bit.

It would indeed not really be a reduction in work, and probably more work, especially in the short-term.

He would be giving up some equity in the company and I’d be giving up some immediate revenue.

Whether it makes sense for either of us… I’m not 100% sure yet. But I like the idea of being a part of something that is marketable and has longer-term prospects for growth than my current business.

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As a solo practitioner, it’s hard to get excited – for me, at least – about working with the same clients every day. It’s nice to have a steady income but I want variety too. If they’re growing at a fast clip, then that satisfies me (which, of course, I have some influence over). But if you’re maintaining the same budgets and optimizing them over time for incremental improvements… well, I can certainly understand your point of view. And there’s only so many keywords you can research or bids you can adjust before you start to lose some of the passion. It sounds like you may need bigger challenges and a partnership may help provide them both in terms of reinvigoration and creating more long-term opportunities for everyone involved. 1+1=5. Good luck!

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